News today in the US print edition of the Wall Street Journal that Jack Lew and the US Treasury have issued a third ruling in an effort to curve corporate tax inversions.See US Sets Tougher Rules on Tax Deals. Such a practice is older then we are and part and parcel of any firms’ arsenal to reduce its tax burden. It is little different to the idea that we might physical move our home (our HQ) to another state, even though we work elsewhere, in order to reduce the state tax burden. Note that for you and me, federal tax is applied at the place of work, not where we live, so the analogy is not quite perfect, but you get the point for state taxes.
Jack Lew, a most political of Treasury individuals, is looking the wrong way. His actions are appalling – just look at what happened overnight. The article suggests that this ruling directly impacts a deal in the works right now between Pfizer and Allergen. More to the point, Allergen’s stock price has slumped 19% overnight due simply to this ruling. Jack Lew is fiddling around in the private industry with increased regulation, in a vein attempt to prevent tax losses. The real goal should be to lower the corporate tax burden in order to encourage firms to repatriate their billions of dollars kept overseas. Firms should want to invert to the US, not away from it! Jack Lew and his democratic buddies are giving Trump just what he needs – more of the same Washington intervention in the guise of over burdened tax policy.
Guess where the following quote comes from:
“Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more – and who when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.”
This is from none other than John Maynard Keynes and his The Means to Prosperity, published March 1933, as four articles in The Times. Though written at a time when inversions were unknown, he refers to the principle of a government agent increasing taxes at a time when tax revenue is falling, in a vein attempt to increase receipts. Jack Lew is trying to ensure that tax receipts do not leave to territories that have a lower tax burden than his own. Mr. Lew is looking at the wrong game and should be trying to encourage growth of the private sector – instead he thinks he can grow the public sector at the expense of the private. No, no, no!
Have at it, The Donald!